Israel’s 2025 war budget squeezes disposable income of working-class households

Israel’s 2025 war budget squeezes disposable income of working-class households

Prime Minister Benjamin Netanyahu, center, at the start of cabinet meeting meant to
approve the 2025 state budget, October 31, 2024 (GPO)

Government drops plans to freeze welfare benefits and tax ‘advanced study’ funds, instead wants to raise National Insurance payments while barely cutting coalition funds

Israelis are set next year to pay more taxes and are slated to have less disposable household income while receiving fewer public and government services, after the cabinet approved the 2025 budget spending plan to finance rising war costs.

On Friday, Israel’s cabinet passed the first hurdle for the passage of the 2025 budget after making last-minute changes, which included scrapping a plan to freeze government allowances and benefits and removing tax benefits to savings vehicles. This is the good news.

The bad news is that there is a trade-off. The government still needs to put together an austerity package of NIS 37 billion ($9.9 billion) in the form of tax hikes and steep spending cuts to fill a fiscal gap between expected revenue and high defense expenses, as the country is almost 13 months into a war with the Hamas terror group in Gaza and a conflict with its ally the Hezbollah terror group in Lebanon. The government has a target to rein in a budget deficit that has already ballooned to 8.5 percent of GDP. For 2025, the deficit ceiling has been set at 4.3%.

Instead of a freeze of welfare benefits paid to the elderly, people with disabilities, Holocaust survivors and families of fallen soldiers proposed by the Finance Ministry, it was decided to increase National Insurance contributions by a corresponding amount.

“The main thing that comes out of this budget is that the working population that pays taxes and serves in the army is going to be hurt the most,” Dr. Gali Ingber, head of finance studies at the College of Management Academic Studies, told The Times of Israel. “Many of the tax changes will affect employees’ net income, putting a big burden on the working class.”

Israelis are set next year to pay more taxes and are slated to have less disposable household income while receiving fewer public and government services, after the cabinet approved the 2025 budget spending plan to finance rising war costs.

“We would have expected the government to set an example and show us that they are cutting budgets from ministries, but they went for a 5% across-the-board spending cut, which is not enough, and they left coalition funds almost intact,” Ingber lamented.

Gali Ingber, head of finance studies at the College of Management
Academic Studies. (Courtesy)

The NIS 607 billion ($162 billion) state budget spending plan for 2025 still needs to be approved by the Knesset, and there are likely to be further changes and adjustments along the process. It must be passed by the end of March or the government would automatically fall, triggering early elections.

“It was anticipated that the proposed freeze on government allowances and removing the tax benefit on keren hishtalmut [advanced study] funds would not be passed as these create a lot of noise in the public,” said Yoram Leviant, a pension and retirement expert. “The government could have cut their own expenses and give up some unnecessary government offices and jobs, but it is easier to take additional taxes from the working population.”

“The average middle-class family is going to see an increase in taxes and other expenses because net income will not go up as much as taxes and living expenses,” Leviant added.

Summary of the tax-related measures to come into effect in 2025 if passed by the Knesset:

• National Insurance contributions, which include health tax payments, will be increased. Currently, the employee contribution rate is 3.5% up to a wage of NIS 7,522 per month and about 7% on income above that. The government has not yet published the full details of the hike but it is expected to add between NIS 1,000 to NIS 2,000 a year in contributions to an average household. National Insurance contributions are often described as a form of tax, as it is collected by the state to finance public goods.
• A freeze of income tax brackets and tax credit points, which means that they will not be adjusted higher in line with inflation. As consumer prices are expected to be around 4% this year and 3% next year, many workers may end up seeing their real post-tax incomes drop, according to Ingber. “If our net income is going to stay the same while inflation is around 3%, then our real wage is going down, and the purchasing power to buy goods with the same money will be hurt,” said Ingber.
• Freeze of two recuperation days per employee in 2025, which translates into a reduction of about NIS 800 in recuperation pay for every worker.
• Value-added tax, which is an indirect tax that is collected through the purchase of goods and services, will rise from the current 17% to 18%. VAT in Israel is levied on most consumer goods and services. It is a regressive tax, meaning that a higher rate harms the lower-income population more than higher earners, and contributes to increasing the already high cost of living in Israel.
• The tax exemption rate on pensions, which was planned to be raised, is expected to remain at its current rate in 2025.

Finance Minister Bezalel Smotrich (C) meets with the head of the Histadrut Labor Federation Arnon Bar-David (2nd L) meet on September 12, 2024 (Courtesy/Smotrich’s spokesperson)

Some of the proposed tax changes and austerity steps that were axed for now:

• Taxing interest and profits accumulated under Israel’s only short-term, tax-free savings plan — a so-called “advanced study” fund known in Hebrew as keren hishtalmut. The fund allows investors to withdraw money accumulated after six years without paying a capital gains tax.
• Freezing government welfare benefits paid to the elderly, people with disabilities, Holocaust survivors and families of fallen soldiers, with the exception of child allowances.
• Cancellation of the VAT exemption for incoming tourists.
• Freezing the automatic update on the minimum wage, which harms employee salaries in the public and private sector.

Yoram Leviant, pension and retirement expert. (Courtesy)

Alongside the tax hikes, the Finance Ministry plans to cut hundreds of millions of shekels from government ministries and services, including health, education and welfare in 2025. The government also left in place a sum of about NIS 4.1 billion, cut from NIS 4.3 billion, in controversial coalition funds — monies doled out to fulfill political promises made when wrangling to form a coalition government.

“We would have expected the government to navigate money to sectors that encourage future growth, for example, to encourage the high-tech sector and support local agriculture, or build hospitals, as well as a new medicine faculty in university as we don’t have enough doctors in Israel,” said Ingber.

Economists have already cautioned that the government’s deficit target of 4.3% for 2025 is too optimistic as it assumes a conclusion of the war by the end of 2024.

“If the security situation worsens and the war lasts longer, there are probably going to be additional budget allocations and the need for resources to finance security expenses,” said Leviant⍐.